Stock markets have been range-bound for a while amid global and domestic uncertainties. However, this trend could change in a few months, believes Manish Sonthalia, VP & Fund Manager, Motilal Oswal Asset Management. In an interview with Sheetal Agarwal, he says there are more upsides than downsides in the markets as well as in corporate earnings, since most negatives have already been factored in. Edited excerpts:
What is your view on the markets? How long do you expect the sideways moves to continue?
We are bullish on the markets, as most negatives are already known and discounted for. Soothing commodity prices is a positive. Going forward, commodity prices will further correct due to a slowdown in global economies. We expect markets to break out after the September quarter. We believe there will be more upsides than fall from here on.
What is your take on current valuations and where do you see the markets heading this financial year?
Which sectors are you bullish/bearish on and why?
We are currently leaning heavily on the financials and consumers space. Further, we believe, extremely beaten down sectors, like infrastructure and real estate, should change on the back of attractive valuations. Factors like peaking of interest rates and rise in government spendings would act as key catalysts for these sectors. In case of banks, we believe that most concerns are priced in currently. Also, concerns on asset quality are overdone and NPA levels should come in lower than consensus estimates. Another sector we like is auto, where we find valuations attractive.
Do you expect margin pressure witnessed by companies in the June quarter to extend for the rest of the year?
We think the June quarter will be the worst. After that, interest rates and raw material prices should come off. Thus, by September, Ebitda margins should improve.
FII inflows have been relatively weak. Do you think India is losing out to its peers in the emerging markets?
On valuations, India is nowhere close to the cheapest. A price/book of 2.5 times at ROE of 17-18 per cent makes us more expensive than other emerging markets. However, this premium is justified, given that we are not as heavily commodity-dependent as some other emerging economies. We believe that (valuation premium) should not change significantly, going forward. Worries on inflation is keeping foreign fund inflows in India subdued and this will continue till inflation tempers down a bit. If QE3 happens it will benefit all emerging markets, as more money will be created. Also, pick-up in regulatory reforms (raising FDI limit in some sectors) will improve sentiments.
How have you churned your portfolio in the last six months?
We have taken a bottom-up approach and leaned heavily on the consumer space, trimmed exposure to commodities. We are underweight on engineering, infrastructure and are looking at right entry points into these sectors. We are neutral on the IT and pharma sectors.
What is your advice for retail investors in the present market scenario?
There is a lot of investor fatigue right now. This is not the time to trade the markets. One should remain invested for the next six months or so to gain from the rally. This is the market for investment, not trading.